Pharmaceuticals Public Policy

Why Congress should not mandate disclosure of drug development costs

An article from the Health Affairs forefront article from Ho and Vertinsky (2022) argues ‘yes’, but the use of any such such information for cost-based pricing is short-sighted.

The Ho and Vertinsky say drug cost disclosure would be useful because (i) currently there is little information on the cost of drug development, (ii) it is unclear whether treatments produce good value for money, (iii) drug prices have increased over time, (iv) having more information on cost can help promote innovation. Let’s take each of these arguments in turn.

  • Limited information on the cost of drug development. Although we could always use more information, the point that there is very limited data on drug development is not true. There are a number of studies on the cost of drug development (e.g., DiMasi et al. 2016; Wouters et al. 2020). Further, venture capital firms almost certainly have good information on the cost of drug development. For large publicly traded pharmaceutical firms, research and other costs are public on their financial statements. The bigger issue, however, is that of survival bias. It may appear on financial statements that successful pharmaceutical make outsized profits, but these figures must also take into account that many pharmaceutical firms have drugs that fail and the companies go out of business. If you only examine the cost of drug development for those with successful drugs, this will underestimate the true cost of drug development.
  • Are innovations even worth it? This is a very important question, but not one that will be solved with more cost information. Drug pricing should be linked to treatment value where value is correlated with broader health (and other) benefits gained less the cost of the treatment. While Ho and Vertinsky are correct that cost effectiveness studies are conducted less frequently in the US than in HTA countries, there are numerous resources (e.g., IVI, ICER, the Tufts Cost Effectiveness Analysis Registry) that do create CEA models or inventory existing ones. Having more cost information would not help determine if treatments provide good value to society as only health benefits and drug prices (not development costs) go into the value measurement equation. It could be the case that one would use “cost plus” pricing to try to reduce pricing, but doing so would be counterproductive as it would incentivize pharmaceutical firms to raise development costs rather than focus on high value products.
  • Drug prices have increased over time. This is a true statement for branded list prices. However, at the same time rebate amounts have also increased over time. For instance, in one study, the price for diabetes medications increased 8%-15% per year between 2005 and 2017 but after accounting for rebates, the actual net prices fell for 2 of 3 drug classes. Additionally, the price of generic drugs in the US remains very low. In fact, prices may be too low as 40% of generic drugs have only 1 manufacturer.
  • Information on cost can promote innovation. I am not totally clear how that would be the case. Clearly, pharmaceutical firms, biotechnology companies, and venture capital firms have a very good idea of the costs to bring drugs to market. It is unlikely that the federal government would be able to reduce cost for these corporations in an efficient way. Alternatively, if the information on drug development cost was used in pricing–as mentioned above–any cost-plus pricing regime would only incentivize increased cost, not increased innovation.

While the high cost of some drugs makes many want to understand why drug costs are so high, simply forcing pharmaceutical manufacturers to share drug development costs is unlikely to be beneficial to patients, policymakers, payers or broader society.

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